Stock options are contracts with terms that can change prior to expiration. Mergers, acquisitions, special dividends and stock splits are some of the events that may necessitate the change in terms. Since early September, New Orient Edu&Tech (EDU) has been on the Blue Collar Premium Stock List. In the middle of September I received several emails from members wondering what happened to the strike prices they sold. Several members had sold the $21 call options and wanted to buy them back prior to expiration but they no longer existed…They were gone!
EDU had issued a 1-time special cash dividend of $0.35 per share with an ex-dividend date (date you must own the shares to capture that dividend) of September 4th and payable on October 7th. Here is the information gleaned from the CBOE site (www.cboe.com):
The dividend would be earned by all who held ownership in the shares on September, 2013. Whenever a dividend is distributed the price of the stock will decrease by the amount of that dividend because the company will have that much less cash and therefore be worth less. In order to make buyers and sellers of calls and puts “whole” after the price change, adjustments are made in the contract terms. In this case the strike prices were adjusted down by the dividend amount as shown below:
The row highlighted in yellow shows the change in the $21 strike price to $20.65. As covered call writers, although the price of our shares will technically decline in value, we will, in fact, capture the dividend on October 7th to make us “whole”
To retain ownership of the shares and to roll the option, a covered call writer would then buy back the $20.65 and re-sell that or another next month strike. The chart below shows the short-term price dip around the time frame of the ex-dividend date and the performance of this equity since that time:
The price dip was partially due to the special dividend.
When we see that a strike price we had previously sold no longer exists, it is usually due to an event that caused the Options Clearing Corporation (OCC) to change the terms of that option. The changes are made to make investors on both sides of that trade “whole” The best action to take is to call your broker or check the CBOE site or a similar one to learn the new parameters of the contract.
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Next live speaking engagement:
Tuesday, January 14th
6:30 – 8:30
A very confusing jobs report culminated a week of mixed economic reports:
- According to the Labor Department, 74,000 jobs were added in December, below the 197,000 expected and less than the 241,000 added in November
- Despite this disappointment, the unemployment rate dropped to 6.7%, below the 7.0% expected. The reason for these positive and negative signals has to do with the fact that many Americans are no longer looking for work and have dropped out of the work force. The 6.7% stat is a 5-year low
- Consumer credit [a report of the dollar value of consumer debt, including categories such as credit card use and store charge accounts (known as revolving debt) as well as longer-term loans for autos, education, recreation vehicles, etc. (known as non-revolving debt). The level of consumer credit is considered a barometer of consumers’ financial health and an indicator of potential spending patterns] rose by $12.3 billion in November, although credit card debt increased by a meager $500 million
- Orders for manufactured goods rose by 1.8% in November, turning around the 0.5% decline in October
- The ISM non-manufacturing index came in at 53.0 below the 56.0 anticipated and at the lowest level since June but still showing expansion
- The US trade deficit decreased to $34.3 billion in November, the lowest level in 4 years. This was the result of exports increasing by 0.9% while imports decreased by 1.4%. A deficit of $40 billion was projected by analysts
- Minutes from the Fed’s December meeting showed that the winding down of the quantitative easing program was due to improving economic conditions as well as rising costs
- Janet Yellen was approved by the Senate to be the next Fed Chair taking over for the outgoing Fed Chair Ben Bernanke
For the week, the S&P 500 rose by 0.6%.
IBD: Confirmed uptrend
BCI: This site retains its long-term bullish stance, currently favoring out-of-the-money strikes 2-to-1.
Much success to all,
Alan ([email protected])